Richard M. Nixon - "nixonomics"

Like most presidents, Nixon had little grasp of complex economic issues
but a clear understanding of his political stakes in them. At all costs a
recession and high unemployment were to be avoided going into the
reelection year of 1972.

The president inherited a mess. Johnson had not followed the advice of his
economists, and the result was soaring inflation (up to 5 percent in the
last quarter of 1968, double the average rate since 1956). Unemployment
was low, at 3.3 percent. Given a tradeoff between unemployment and
inflation, Nixon would accept higher unemployment rates in order to cool
down the inflation, provided it would lead to prosperity by 1972.

Early economic policies, set by Treasury Secretary David Kennedy, Under
Secretary Paul Volcker, and Labor Secretary George Shultz, called for a
relatively tight budget and a moderately restrictive monetary policy by
the Federal Reserve Board. A tax bill passed in 1969 incorporated several
Nixon initiatives, including a repeal of the investment tax credit and
removal of 2 million of the nation's poor from the tax rolls. But
by 1970 it was clear that the program was not working. In June of that
year the Council of Economic Advisers began issuing "inflation
alerts." By July a shortfall in revenues led Nixon to embrace the
concept of the "full employment balanced budget," which
provided for large deficits if the amount of expenditures did not exceed
the revenues that would have been obtained under conditions of full
employment. When Nixon submitted his budget to Congress in January 1971,
he used this concept to justify a proposed $11.6 billion deficit and even
publicly embraced Keynesian economic principles to argue that government
expenditures would pull the nation out of recession. For a Republican
president, all this was quite unorthodox, as Democrats gleefully pointed
out.

With inflation and unemployment both on the rise, Nixon's appointee
to chair the Federal Reserve, Arthur Burns, shifted from a tight-money
policy. Early in 1971 the president began to criticize unions and
management for agreeing to excessive wage increases in the steel industry.
Nixon established the Tripartite Committee to monitor union settlements in
the construction industry. By late spring, recently appointed Treasury
Secretary John Connally was convinced that bold new measures were needed.
By early summer the balance of trade had deteriorated so much that a
full-scale flight from the dollar ensued. Unemployment was over 6 percent
and climbing.

Meetings held at Camp David in mid-August produced agreement on a new
economic program. As outlined by Nixon to the nation on 15 August in a
nationwide television address, it included the closing of the gold window
and the ending of the convertibility of the dollar into gold; actions that
amounted to an 8 percent devaluation of the dollar against other major
currencies, thus stimulating American exports; a 10 percent surcharge on
foreign imports to discourage their consumption; and measures to stimulate
the domestic economy, including an end to the excise tax on automobiles, a
10 percent tax credit for business investment, and a speedup in the
personal income tax exemption, to be reflected in reduced withholding
taxes in workers' paychecks. To counter the inflationary
psychology, Nixon announced a ninety-day freeze on wages and prices (under
authority granted to him the year before by the Democratic Congress) and
the establishment of the Cost-of-Living Council. These measures, dubbed
the "Nixon shocks," were taken without any prior
consultation with America's allies, which caused severe strains in
relations with them. Inflation was halted temporarily and then slowed as a
second phase was implemented on 14 November 1971, with creation of the Pay
Board and the Price Commission, which could monitor compliance with
guidelines for increases in wages and prices.

By the beginning of 1972, with 2 million more people out of work than in
1969, the administration began to stimulate the economy. The budget sent
to Congress in January provided for a $25.2 billion deficit. Government
agencies accelerated their purchases from businesses. The Federal Reserve
Board expanded the money supply by 9 percent in the election year, leading
to charges (which Burns vehemently denied) that Nixon and Burns had made a
deal to ensure Nixon's reelection and Burns's
reap-pointment. By the autumn the economy seemed to be turning around.
Inflation remained under control, unemployment was dropping, and the
recession had ended. Later the American public would pay the price for
these election-year arrangements. Inflationary forces could not long be
suppressed by wage and price controls, and when they were lifted, the
effects of increased deficits, an expanded money supply, and the rise in
oil prices made themselves felt: inflation increased to 8.8 percent in
1973 and 12.2 percent in 1974, beginning a decade of exceptional price
instability marked by increasing inflation rates through the end of the
Carter presidency.